July 12, 2019

CFTC Issues Order Finding that Korea Exchange, Inc. Made a False and Misleading Certification to the CFTC

Washington, DC – The Commodity Futures Trading Commission (CFTC) issued an Order today filing and simultaneously settling charges against Korea Exchange, Inc. (KRX) of Busan, South Korea, for making a false statement to the CFTC.  The Order finds that on February 19, 2018, KRX falsely represented in its annual certification that it was in compliance with the CFTC’s exemptive order requiring that KRX observe certain important international financial management standards. In fact, according to the Order, KRX had discovered that its policies and practices were inconsistent with those standards and had already begun remedial measures to address those failures.

The CFTC’s Order requires KRX to engage an independent third party to assess KRX’s observance of these financial management standards, with reports of that assessment submitted to the CFTC on a periodic basis over the next two-and-a-half years.  The Order also imposes on KRX a civil penalty of $150,000.00.

James McDonald, Director of the CFTC’s Division of Enforcement said: “In granting exemptions from registration, the CFTC relies on market participants’ representations that they are compliant with the terms of the exemption.  Market participants must take this obligation seriously and provide truthful information when communicating with the Commission.  When they do not, the CFTC will take action. It is notable here that once KRX learned of the issue, it timely and appropriately remediated, including making relevant risk management arrangement changes and significantly restructuring its CCP clearing operations, to ensure the underlying issues would be resolved expeditiously.”

According to the Order, in 2015, KRX was granted an exemption from certain registration requirements under the Commodity Exchange Act.  In order to maintain that exemption, KRX is required make an annual certification to the Commission regarding its observation of the Principles of Financial Market Infrastructures (“PFMI”).  The PFMI were developed and issued by the International Organization of Securities Commissions, commonly known as IOSCO, after the 2008 financial crisis. 

As found in the Order, for important financial market participants like KRX, the PFMI provide that the market participant conduct daily tests to ensure financial stability in the event of an extreme but plausible market event.  The results of those daily tests are to be used by market participants like KRX to evaluate and adjust the adequacy of financial resources. 

The Order finds that while KRX conducted the daily tests, they failed to use those results to appropriately evaluate the adequacy of and adjust its total financial resources.  The Order further finds that KRX knew, as of October 2017 that its practices with respect to the daily tests were not consistent with the PFMI.  In fact, KRX began considering remedial measures in October 2017, and changed its policies in December 2017 to make them consistent with the PFMI.

Despite knowing that its policies and practices were not consistent with the PFMIs throughout most of 2017, in a February 19, 2018 letter to the Commission, KRX certified that it continued to observe the PFMIs in “all material respects” and “has complied with each of the terms and conditions stated in the Order of exemption from registration as a DCO as issued by the CFTC.”  The letter did not disclose either the failure to use the tests to evaluate the sufficiency of its total financial resources on a daily basis or the remedial efforts that were ongoing, according to the Order.  Therefore, the Commission found that the letter was false and misleading, and constituted a violation of the Commodity Exchange Act which prohibits making false or misleading statements in a report filed with the Commission.

CFTC Division of Enforcement staff members responsible for this action are Joseph Konizeski, Scott Williamson and former staff member Diane Romaniuk. CFTC Division of Clearing and Risk staff members Michael Margolis and Theodore Polley also contributed substantially to this matter.